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Saturday, December 13, 2014

A Look Back At How The Ukraine Crisis Erupted And What To Expect In 2015

KIEV, Ukraine -- A year ago, Ukraine was not a place that warranted much attention. It was merely a poor country in a part of the world that featured neither oil nor terrorism.

Protesters clash with police on Jan. 19, 2014 during an opposition rally in the centre of Kiev in a show of defiance against strict new curbs on protests.

It was, in that sense, a place like many others that students might learn for a geography test or a school report and then promptly forget.

What a difference a year makes.

Today, Ukraine is exciting and sexy, for all the wrong reasons.

It is at the vanguard of a new Cold War, or perhaps, the final battle of the old one.

Whichever is the case, it certainly holds the world’s attention now.

Politicians now discuss its fate in the halls of power and news agencies stretch their tight budgets in order to put correspondents on the ground there.

Yet now, as the crisis enters its second year, I fear that we often focus on the sturm und drang of daily events to such an extent that we’ve lost sight of how we got here, why events played out as they did and where we can expect them to go next.

As 2014 draws to a close it’s time that we look back, take a full accounting and make sense of where things are heading.

The Beginning: Ukraine’s 2004 Orange Revolution

While to many in the west, the protests that erupted this past winter seemed to come out of nowhere, they were actually a continuation of a much larger trend.

In fact, Ukraine’s political awakening began back in 2004, with the Orange Revolution.

The issue at hand back then was a falsified Presidential election, featuring a technocrat, Viktor Yushchenko and a thuggish, twice convicted felon backed by the outgoing regime named Viktor Yanukovych.

When it became obvious that the election had been stolen, hundreds of thousands of people went to the streets.

Back then, I had just begun to work with an up and coming news magazine called Korrespondent and so found myself very much involved in what happened.

I spoke to reporters, went to the protests on the Maidan (Kiev’s Independence Square) and regularly discussed the events with a variety of business and political leaders.

Although no one knew how things would turn out, it was obvious that we were witnessing a historic event.

While the regime still had broad support among the older generation, many young Ukrainians had no memory of the Soviet Union and had adopted decidedly western values.

Culture shifts within the society that had been tectonic spontaneously erupted with kinetic energy.

Clearly, the regime was unprepared for such an outpouring of dissent.

After a little over a month, it finally gave in.

New elections were called and Viktor Yushchenko assumed the Presidency in January of the next year.

The normally docile Ukrainian populace had risen up and finally demanded accountability from their leaders.

2005-2010: Democracy Sputters

There were heady days after the Orange Revolution.

A wave of optimism reverberated throughout the country and investors flocked to seek new opportunities in Ukraine.

Korrespondent rose to become a dominant news outlet and its parent company, KP Media—of which I became Co-CEO—grew by leaps and bounds.

Yet within a few years, it became clear that the optimism had been misplaced.

Although there was a clear break from the past, there was no vision for the future.

The government soon fell into infighting, corruption increased and growth sputtered.

After a short time in the sun, the country descended once more into obscurity, incompetence and hopelessness.

The global financial crisis of 2008-2009 put the final nails in the coffin.

The hryvnia, Ukraine’s currency, fell by more than 40%.

At KP Media, we had to close several business units, sell some others and I chose to leave the company.

By the end of 2009, Yanukovych, the chief villain in the Orange Revolution, was elected President in a fair election.

It seemed that the Orange Revolution and everything it had achieved had all been for nothing.

2011-2013: Yanukovych’s Insatiable Power Grab

In 2011, I left Ukraine and what remained of KP Media—Korrespondent and Bigmir, Ukraine’s major Internet Portal—was sold to a group led by Petro Poroshenko (now the President of Ukraine) and Boris Lozhkin (now his Chief of Staff).

While I was nervous about the powerful Korrespondent news brand being put in a more vulnerable position politically, I was somewhat comforted that it was left in relatively responsible hands and that our staff continued to be employed.

Meanwhile, the new regime was moving to tighten its grip.

The Ukrainian Constitution was amended to install greater powers in the office of the Presidency.

Yulia Tymoshenko, the most significant political figure outside the regime, was jailed on trumped up charges.

The 2012 parliamentary election—almost universally condemned by international monitors for irregularities—gave Yanukovych’s party, the Party of Regions, a firm majority.

So by 2013, Viktor Yanukovych had consolidated political power and proved to be a model of avarice and incompetence.

Corruption reached new heights (experts estimate that Yanukovych and his cronies looted tens of billions of dollars—quite a feat in such a poor country).

Scandals, epitomized by the heinous case of Oksana Makar, began to pile up.

Yet despite the regime’s dominance, Ukraine was still largely a free country, with a vibrant press, competent reporters and an active civil society.

So now, having seized a firm hold on the organs of government, Yanukovych moved to squelch dissent by taking control of the press.

In the summer of 2013, the Chief Editor of Korrespondent, Vitaly Sych, was called back from vacation in Croatia.

When he arrived back in Kyiv, he was informed that the company had come under political pressure and was being sold to Sergei Kurchenko, widely regarded as being a front man for President Yanukovych.

The new ownership gave Vitaly an ultimatum—toe the line and publish what we tell you or walk away.

Similar demands were made to other publications in the group, which at the time comprised one of the largest independent media holdings in the country and included international publications such as Forbes Ukraine.

Vitaly and his staff chose to resign, rather than become part of the regime’s propaganda machine (as did the Chief Editor and staff of Forbes Ukraine).

Vitaly discussed the incident, as well as other aspects of the crisis, with Tom Friedman of The New York Times at the Aspen Institute this past summer.

As 2013 was drew to a close, Viktor Yanukovych was, for all intents and purposes, the supreme ruler of Ukraine.

However, trouble lurked beneath the surface.

Due to the endemic corruption and incompetence of his regime, the country was in dire financial straits.

Further, his government had made two commitments that would lead to his downfall.

The first was a trade agreement with the EU, which Yanukovych had pledged to pursue during the 2009 Presidential campaign that brought him to power.

The second was the Eurasian Economic Union that Vladimir Putin was creating to reunite former Soviet states.

While ostensibly not mutually exclusive, these dual mandates would eventually prove to be unmanageable.

Euromaidan: A New Revolution Erupts

On November 28th, President Yanukovych attended the EU summit in Vilnius where the EU Association Agreement was to be signed.

It is one thing to steal, to make a mockery of the rule of law and to run the country far below any reasonable standard of competence, but the prospect of EU integration had come to symbolize inclusion into the community of nations and a chance to live a normal life.

This final insult, as it turned out, was more than the nation could bear.

That night, a young journalist and activist named Mustafa Nayem, was moved to post this on Facebook:

Okay guys, let’s get serious. Who’s ready to go to the Maidan today at midnight? “Likes” will not counted. Only comments under this post with the words “I’m ready.”

Once there are more than a thousand, we will organize it.
In the space of an hour, there were more than 600 comments and Nayem posted once again that they would meet at 10:30.

Within hours, more than a thousand people showed up to protest.

The Euromaidan revolution had begun.

In the ensuing days. the crowds swelled further.

First 10,000, then 50,000 and before long, the protesters had set up camps.

They were in it for the long haul.

The regime fought back, but to little avail.

Riot police attacked, yet more people came to the Maidan.

Yanukovych passed a law outlawing the protests and even more came.

Things escalated and soon there were Molotov cocktails, helmets, and improvised shields.

Then the shooting started and nearly 100 were killed.

I watched these scenes, not from the front lines as I did in 2004, but from afar.

Yet still, it was horrifying.

It’s a chilling feeling to watch as familiar streets—places where I would meet friends, walk my dog and buy milk for my baby girl—were transformed into a war zone.

Many of those close to me experienced danger that would have been unimaginable just a few short months before.

The world took notice and the diplomats came.

Meanwhile, away from the cameras, other meetings were held in Parliament.

Yanukovych’s allies in the Party of Regions had enough and were ready to defect.

The oligarchs, facing sanctions against their western assets, were through with him as well.

The protesters had prevailed.

Ukraine was done with Yanukovych for good.

Yet even greater challenges lie ahead.

2014: The Empire Strikes Back

We can only imagine what was going through Vladimir Putin’s head as he watched these events.

He had also faced protests after his return to the presidency.

Now his agent in Kiev had not only fallen, but had become a fugitive from justice.

Was this what the future had in store for him as well?

Within days, Putin’s clandestine forces—nicknamed “little green men” by the Ukrainians— seized power in Crimea.

The next month, a sham referendum was held that allowed Putin to annex the Ukrainian province, violating the 1994 Budapest Memorandum in which Russia pledged to respect Ukraine’s sovereignty in return for its abandonment of nuclear weapons.

Next, he moved forces into Eastern Ukraine, hoping to sow discontent and seize territory reaching across the country to Transnistria, a Russian controlled enclave in Moldova.

If he could not expand Russian influence by subterfuge, he would do it by force.

As it turned out, he didn’t get very far.

Anti-maidan protests in key cities like Kharkiv, Dnipropetrovsk, Zaporizhia and Odessa—where much of Ukraine’s high value industry is located—never gained traction.

Yet in Donbass, a region of made up largely of basic industry and poorly educated coal miners, the Russian backed insurgency made significant gains.

What Lies Ahead

That brings us to now.

To date, over 4,300 people have been killed in the conflict in Eastern Ukraine, with many more wounded and more than half a million displaced.

The Russian economy is in shambles, crippled by western sanctions and a precipitous drop in the price of oil, its main source of hard currency.

The ruble has lost nearly half its value, more than at any time since the 1998 crisis.

Yet still Putin remains defiant, giving jingoistic speeches, launching clandestine political operations in Europe and unleashing an army of Internet trolls on western media outlets.

His approval ratings among the Russian public hover over 80%.

So where do things go from here?

What steps can we take to alleviate the crisis?

Back in May, I gave three points that I believe are key to understanding how the crisis will play out.

They seem as valid now as they were then.

1. Putin will not be deterred:

There is little indication that Putin is a rational actor.

If anything, he seems to be motivated by a bizarre Eurasian philosophy, which is part revisionist history, part nationalism and part cultural mysticism.

At the same time, he is unlikely to be swayed by insurgent elements within his ranks.

As Masha Gessen recently pointed out, the idea of an omnipotent Russian oligarchy is a myth.

In reality, just about anybody with money and power in Russia owes their good fortune to Vladimir Putin.

His hold on the country is nearly absolute.

So forget about persuading Putin to back down.

We can affect his calculus, but not his intent.

2. Everyday, old Soviets die and new Ukrainians are born:

While Putin is unlikely to be deterred, neither will the Ukrainian populace.

During the Orange Revolution in 2004, people in their twenties had no memory of, nor nostalgia for, the Soviet Union.

Now, it’s people in their 30’s.

The trend is clear.

As time passes Ukraine becomes more European and less Russian.

Ukrainians are highly educated and highly skilled—Elance ranks Ukraine third in the world for high-tech outsourcing.

They are also well travelled and politically active, staging protests against their own government at the first signs of backsliding.

The loss of Russian-leaning Crimea and the population displacements in the east accelerate these trends further.

There is a new feeling of national unity and independence in Ukraine that is not likely to reverse itself.

3. Energy prices are likely to go down, not up:

The speed of the fall in the price of oil took nearly everyone by surprise, but the direction has been clear for some time.

Even when I wrote the original article this past spring and the price of oil was over $100, Citigroup was predicting $90 oil and Barron’s thought it could go to $75.

Now the price for Russian oil has dropped to the low $60 range, more than a 40% decline since the summer.

That combined with western sanctions, will deliver a crushing blow against Russia.

The country has roughly $700 billion in external debt—over $100 billion of which becomes due in the next year—and no way to effectively refinance it.

Today, Russia is on the brink of its own crisis.

Inflation and capital flight are endemic, its oil fields are drying up and, because of the sanctions, it cannot easily develop new ones.

Its industry has been starved by corruption, neglect and Dutch disease.

At the present trajectory, Russia will undergo a full economic collapse within two to three years—its third since 1991.

At the same time, Ukraine is destitute and dependent on western largesse.

Its military is poorly trained and underfunded.

The country still suffers from its own endemic corruption and significant foreign investment, at least in the near term, is unlikely.

So what we can expect over the next year is a stalemate.

Ukraine is too weak to push the Russians out and Russia lacks the capacity to deliver a decisive blow.

While it is unlikely that western powers will let Ukraine collapse, it is equally doubtful they will give it enough support to prosper.

However, there are still reasons for optimism.

There are signs of real reform in Ukraine and the will of the Ukrainian people is something that politicians in the country have come to not only respect, but fear.

The new parliament is predominantly pro-western and includes many committed social activists such as Mustafa Nayem, whose Facebook post triggered the Euromaidan protests.

The private sector is showing green shoots of promise as well.

My former colleagues at Korrespondent have found funding for a new venture, Novoe Vremya, which continues the previous tradition of hard hitting journalism and it’s growing fast.

There is also a thriving Ukrainian startup community, which will likely have its first billion dollar company within the next five years.

So while it may seem like the crisis is dragging on, it’s important to remember that it took nearly half a century to free Eastern Europe.

Those countries are now the economic engines of Europe.

It’s only a matter of time before Ukraine, a country of over 45 million hard working and highly skilled people, becomes one as well.

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About Me

We arrived in Kiev (Kyiv) on December 28, 1990 from Morristown, New Jersey, USA. This was back in the days of Perestroika and before Ukraine gained its independence from Moscow, in 1991. We lived in both Kiev and Odessa, Ukraine. After 20 years in the "Workers' Paradise" we returned to the United States of America. Kiev, the capital of Ukraine, is one of the more charming cities in Europe. This 1500-year old city, with a population of nearly 3 million people, is a leading industrial and commercial center of the country. This blog is a public service, for anyone interested in the political, business and social climates of Ukraine. Information is gathered from numerous international and local news sources, and updated 24/7. You are encouraged to leave comments on this blog, but you must have a free Google mail account.